National Express 'was warned it could lose key franchise' weeks before its nationalisation

Rail and bus company National Express knew it may have been on track to lose the East Coast mainline two weeks before the government stripped it of its franchise, official correspondence reveals.

The gap raises questions, which the firm denies, as to whether it may have been trading for a fortnight with a false share price, since it knew it could lose the key route.

However, some City legal experts suggested last night that it may have a case to answer. The Department for Transport (DfT) has confirmed that it told National Express East Coast (NXEC) on June 16 that it was putting the rail operator on 12 months' notice of losing its franchise - fearing that it might default or hand back the franchise.

Express nationalisation: But National Express knew it could lose the East Coast
mainline two weeks before the government stripped it of its franchise

Two weeks later on July 1 Transport Secretary Lord Adonis formally
and publicly told Parliament that it was stripping the company of its
franchise.

He said the franchise was being nationalised after National Express
had announced 'this morning' that it would not be able to financially
support it.

The action came straight after National Express's trading statement.

No mention was given of any earlier notice - despite one peer asking
if the minister had 'any idea' the franchise would collapse. But a
letter obtained by a freedom of information request reveals that the
Whitehall-based Interim Franchise Manager wrote: 'The DfT issued a
formal notice to NXEC on 16th June 2009 informing the company that,
with immediate effect, they were subject to the Last 12 Months
provisions of the Franchise Agreement.'

According to this agreement the provisions kick in when 'the
Secretary of State reasonably considers that an event of default may
occur within the following 12 months' or when he 'considers it
reasonably likely that the franchise agreement will be terminated by
agreement between the parties within such period'.

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National Express paid £1.4billion at the top of the market to
operate the London to Edinburgh East Coast franchise until 2015.
National Express confirmed it received a letter setting out a process -
detailed in the franchise agreement - giving the government more
'visibility' over some East Coast business decisions over the next 12
months.

A spokesman said: 'It is not a countdown to the end of the franchise and the letter could be withdrawn at any time.'

She added: 'We are fully aware of our obligations to update the financial markets and have done so.'

Conservative peer Lord Bates said: 'What the letter suggests is that
at least two weeks earlier a decision had been made by the DfT to
terminate the franchise and take it back into public hands.'

A spokesman for the Financial Services Authority said: 'Firms have a
requirement to disclose anything which a company judges would have a
significant impact on its share price as soon as possible.'

A partner at a major City law firm said: 'As soon as a board becomes
aware of anything likely to have a material impact on the share price
it should notify the market as soon as practicable.

'If you lose a contract you would need to have a very good reason why you waited a number of weeks to tell the market.'

Earlier this year chip maker Wolfson was fined £140,000 by the FSA
for failing to immediately announce price-sensitive information. The
delay led to a false market in Wolfson shares for 16 days.